After spending the past few years expanding its affordable housing business, PNB Housing Finance is now entering micro housing loans and financing for small property developers as it looks to improve loan spreads and support profitability.
The lender expects its affordable and emerging businesses to account for about half of total assets by the end of fiscal year 2027-28 (FY28).
“We are focussing more on emerging and affordable. Currently, my affordable plus emerging ratio is 41%, which should by the end of this year be around 45%. So that will give us an edge in the spread,” managing director and chief executive officer Ajai Kumar Shukla said.
The entry into micro housing is a natural extension of the company's affordable housing business, given the similarities in underwriting, distribution and operating capabilities.
"The only thing is that we will go deeper into the market and there you will get maybe tier 4-5 cities, where we have the branches already placed. We see the opportunity to leverage those branches by way of offering or maybe acquiring those customers also," Shukla told Mint.
The segment offers higher yields of 14-15%, compared with around 12% for affordable housing loans.
PNB Housing has also launched an emerging developer finance vertical aimed at small developers undertaking reconstruction or expansion of individual homes, particularly in markets such as New Delhi, Ahmedabad, Bengaluru and Hyderabad.
These projects typically involve homeowners either selling their property to a developer or partnering with one to add additional floors while retaining part of the redeveloped building. The projects generally have turnaround periods of 18-20 months, with average ticket sizes of around ₹25 crore.
“It's a very good product but the ticket size will be restricted. Delhi itself is a very big market,” Shukla said.
About 41% of PNB Housing's customers are self-employed, while 59% are salaried borrowers. Around 50-60% of its financing is for self-construction or individual houses rather than flats or apartments.
Having only recently rolled out both businesses, the lender expects volumes to gather pace over the coming quarters.
"Gradually it will improve because the policy is in place, the processes are in place, the segments also have been identified. So, it should start giving us some good traction," Shukla said.
Margins seen improving
Margins for the housing financier have been under pressure owing to softer yields on advances amid intense competition and elevated borrowing costs caused by tight system liquidity and high market interest rates.
The company's net interest margin (NIM) narrowed to 3.50% in the June quarter from 3.62% in the preceding quarter and 3.74% a year earlier. Overall yield on advances stood at 9.48%, up 1 basis point sequentially but below 9.99% a year ago.
However, Shukla expects margins to begin improving from September-October as loan spreads recover.
"As far as NIM is concerned, we strongly believe that it has bottomed out now because whatever challenges were there in the market in terms of cost of fund, largely it is stabilised," Shukla said.
Cost of borrowing rose marginally to 7.36% in the June quarter from 7.35% in the preceding quarter but was 40 basis points lower than 7.76% a year earlier.
He expects improving banking system liquidity, helped in part by inflows under the Reserve Bank of India's special foreign currency deposit window, to reduce banks' funding costs, while market borrowings should also become cheaper as interest rates stabilize.
Analysts broadly agree that the lender's strategy should support profitability.
“After successfully strengthening its retail asset franchise during FY25, PNB Housing has shifted its focus towards enhancing profitability,” ICICI Securities said in a post-earnings note.
The brokerage expects NIM expansion to be driven by faster growth in higher-yielding segments such as emerging, affordable and corporate loans, adding that the company's re-entry into developer finance should also support margins. PNB Housing disbursed about ₹200 crore of developer loans in the June quarter.
HDFC Securities said first-quarter earnings were marginally below its estimates because of NIM compression and slower loan growth, although higher other income partly offset the impact.
It noted that loan growth was led by the emerging and affordable segments, but cautioned that rising funding costs and the gradual normalization of credit costs could continue to weigh on return ratios.
Growing the loan book
To accelerate growth in affordable housing, PNB Housing acquired ₹146 crore of affordable loans during the first quarter.
“I think there is an opportunity to grow the book inorganically also. But it will be very limited,” Shukla said, adding that the company remains open to similar opportunities in the affordable housing segment.
For micro housing, however, the lender plans to build the portfolio organically before considering acquisitions.
“It is always good to first do it yourself,” Shukla said, adding that he expects the micro housing portfolio to reach about ₹100 crore by the end of the current financial year.
In its prime home loan business, where competition from banks remains intense, the lender is increasing focus on higher-yielding segments such as self-employed borrowers and loans against property. It is also expanding its corporate and construction finance portfolio, while remaining selective about projects and developers.
“We would be restricting ourselves to 3% of the overall book by 2026-27, and maybe 7-8% by 2027-28,” Shukla said, adding that corporate loans would eventually be capped at around 10% of total loan assets.
He expects the company's overall loan book to grow by about 20% in the current financial year.
The company posted its Q1FY27 results late on Tuesday. Today, the stock ended 2.5% higher at ₹1,150 on the National Stock Exchange.